BUSINESS

Spain's Bankia Bailout Plans Send Borrowing Costs Soaring

05/28/2012 08:51 EDT | Updated 05/28/2012 09:10 EDT
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MADRID, Spain -- Concern over the bailout plans for troubled Spanish lender Bankia and the country's ability to finance itself sent the nationalized bank's share price plummeting and Spain's borrowing costs soaring Monday.

Bankia's shares were down 21 per cent to C1.23 after trading following the bank's announcement Friday that it will need C19 billion ($23.84 billion) in state aid -- the country's biggest bailout -- to shore itself up against its bad loans. The shares had closed at C1.57 before trading was suspended Friday.

Investor remained nervous over Spain's finances and whether it might soon join the ranks of Greece, Ireland and Portugal and seek an international bailout. The interest rate, or yield, for 10-year bonds on the secondary market -- a key indicator of market confidence in Spain's ability to raise funds -- jumped 17 basis points in morning trade Monday to at 6.46 per cent. A rate of 7 per cent is considered unsustainable in the long run.

In comparison, Germany's bonds, seen as a safe haven investment, were at 1.38 per cent, 508 basis points lower than Spain's.

Trading on Madrid's main Ibex 35 share index was down 1 per cent.

Among the chief concerns surrounding Bankia's request for state aid is just how Spain plans to fund the bailout.

Bankia S.A., a fusion of seven cajas -- or savings banks -- was one of the banks hardest hit by Spain's real estate collapse over the past four years. It is estimated to have C32 billion in toxic assets. The Bank of Spain had already agreed to inject Bankia with C4.5 billion in rescue funds last June.

The size of the bailout figure came as something of a shock on Friday and opposition political parties are demanding the government explain how the bank got into such a state.

Bank of Spain estimates show Spain's banks are sitting on some C180 billion ($233 billion) in assets that could cause them losses.

The government fears the cost of rescuing the most vulnerable banks could overwhelm its own finances, which are already strained by a second recession in three years and an unemployment rate of nearly 25 per cent.

Spain has long denied it will follow Greece, Ireland and Portugal and seek international help but the conservative government of Prime Minister Mariano Rajoy has called on the European Central Bank must do more to alleviate its exorbitantly high borrowing costs.